FxWirePro: US election premiums and firm USD correlations support long positions in USD gamma and USD vs. EUR spreads

来源: FxWire Pro - Geo Politics / 04 十月 2016 06:09:11 America/New_York

A few idiosyncratic developments have made this week more eventful that we would have expected, and have caused vols to bottom out from their lows. Nov/Dec US Elections and BoJ/Fed calendars dominate the vol landscape until year end, dwarfing NFPs as vol risk events.

Where there is exceptionally visible low rate volatility in dollar crosses, then it is a warning sign of future USD strength.

Worries around the German financial system are generating pockets of stress in EUR, although FX markers are not as affected as rates - 3M EURUSD basis notably widened sharply to EMU crisis levels at - 60bps, and obviously stocks and credit.

Our long position in 1Y EURINR vega is starting to yield dividends, and our implementation of a short gamma/neutral vega EURTRY spread expires at a small loss, having weathered most of the impact from the July coup.

OTC outlook and hedging frameworks:

US election risk premium in FX options has ticked higher in recent weeks but is still within established ranges.

The market is aware of the fact that there is still a considerable chance that this rate rise too will be postponed again - as happened so many times before. Should Donald Trump really emerge as the winner of the elections on 8th November the risks will no doubt rise again in the Fed’s view.

Concerns that could easily cause the Fed, and above all Fed chair Janet Yellen, to refrain from a rate rise with a reference to the uncertain (global) conditions. The market wants to avoid this trap.

Please be noted that the implied volatility of 1-3m tenors of this pair signifies the hedgers interest in OTM strikes. This would raise a cause of concern that in this phase of time, the above stated major economic events are likely to intensify volatility in FX markets.

The price action in front end vols is nonetheless underwhelming, to the point that a VXY Global Vol index of 1M vols has retraced to Q4 2014.

The market is wary of risk events in Q4, which is leading to an unseen before setup of very low 1M vols vs steep 1M-2M spreads.

Among contributors to this vol curve steepness, it is striking to notice that central banks meetings (particularly BoJ and Fed) are dwarfing NFP dates which used to act as the anchors for vol risk premia. When the linkage between employment, growth and central bank policy was a more straightforward one.

The US elections command the highest risk premia still, with MXN crosses bracing for overnight vols to shoot up to a range of 63 for EURMXN, 76 for USDMXN and 105 for MXNJPY.

For investors looking to own vol with late Nov expiry, USDCAD stands out as one of the best value vol buys.

The indicative offer for 2M USDCAD ATM strikes seems more attractive, the pair delivered 11.0 for Brexit polls and in excess of 15.0 throughout the Q1 deleverage move.

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